EU Parliament Snub Leaves Fate of Carbon Fix to Governments

The 27 European Union governments reached no breakthrough at a meeting in Brussels today to discuss a draft change to the EU emissions law that would enable temporary curbs on the supply of carbon permits in the 54 billion-euro ($70.5 billion) market. Photographer: Fred Tanneau/AFP via Getty Images

April 18 (Bloomberg) -- The rejection by the European
Parliament of a proposed fix to the world’s biggest carbon
market leaves the fate of the rescue plan in the hands of the
bloc’s governments, which have an option to override the
assembly’s verdict.

The 27 European Union governments reached no breakthrough
at a meeting in Brussels today to discuss a draft change to the
EU emissions law that would enable temporary curbs on the supply
of carbon permits in the 54 billion-euro ($70.5 billion) market.
The strategy, which involves delaying, or backloading, the
issuance of some allowances, was rejected by the Parliament on
April 16, triggering the biggest-ever drop in permit prices.

The backloading proposal, which has divided EU nations,
industry and the Parliament, remains alive and the assembly
can’t put an end to it unless the governments fail to support
the plan, according to Terhi Lehtonen, environment adviser to
the Greens group in the assembly. “Member states have to take
positions,” Lehtonen said yesterday in an interview in
Strasbourg, France. “They can’t hide behind the Parliament.”

The emergency carbon fix proposed by the European
Commission aims to help prices in the world’s largest cap-and-trade program rebound after a recession curbed industrial output
and demand for pollution rights. The economic slump aggravated a
glut of permits that swelled to about 1 billion metric tons last
year, or half the average annual pollution limit in the EU
emissions market.

Commission’s Proposal

The Parliament voted 334 to 315, with 63 abstentions, in
favor of an amendment to prevent the commission’s proposal to
alter the bloc’s emissions-trading law. The change is meant to
pave the way for a measure to delay the sale of 900 million
permits over the next three years and reintroduce, or backload,
them to the market in 2019 and 2020.

EU emission allowances for December fell as much as 45
percent to an all-time low of 2.63 euros a metric ton after the
vote and shares in utilities including RWE AG, EON SE and Fortum
Oyj declined. European policy makers expected a price of around
25 euros to 30 euros per ton when the system was started eight
years ago, a level they said would encourage a shift to green
technologies.

Parliamentarians stopped short of adopting an official
position against the rescue plan, and a separate proposal to end
the first reading was rejected by 343 to 300, with 61
abstentions. Instead, the measure was sent back to the
assembly’s environment committee, where political groups will
discuss its future again.

‘Engage Further’

The vote was “not the end of the story,” Isaac Valero-Ladron, climate spokesman for the Brussels-based commission,
said on his Twitter account. The EU executive will press for an
agreement with member states and “engage further” with the
Parliament, he said.

Matthias Groote, chairman of the Parliament’s environment
panel, now has two months to come up with a new report or draft
changes to the commission’s proposal that would be acceptable
for a majority of members. He wants to present a solution
“immediately,” Groote said in an interview on April 16.

Karl-Heinz Florenz, a German member of the EPP who was
against backloading and endorsed referring the draft law change
back to the environment panel, said his vote was meant to be a
signal that he’s “willing to work on the future” of the EU
emissions trading system, or the ETS.

Environment Committee

“I think the backloading proposal is more or less dead for
the EPP,” Florenz said in an interview in Strasbourg. “For me
the door is mostly not closed, but I don’t see any solution in
the environment committee that the whole Parliament could
accept.”

Florenz, a member of the environment panel, said his vote
against the proposed law change was one of the most difficult
decisions he has ever made. While he “absolutely” doesn’t want
to kill the ETS, he couldn’t back the draft law change because
it interfered with the market character of the program, he said.

As the committee considers the future of backloading,
member states could signal their informal support provided they
are confident of the qualified majority they need to approve the
measure, said Paolo Coghe, analyst at Societe Generale in Paris.
Nations can adopt a formal position only after the Parliament
ends the first reading, according to EU rules.

‘Many Uncertainties’

“It’s very difficult to predict if backloading becomes a
reality; there are too many uncertainties,” Coghe said. “If it
doesn’t, the market may fall a little more, to around 1 euro or
1.50 euros. One can argue that its relevance would be severely
diminished, but I’m pretty sure that as soon as the economy
picks up a bit and talks on structural options start moving
forward the ETS will come to the fore again,” he said.

A meeting of climate officials from member states today in
Brussels didn’t bring any breakthrough, according to two EU
government officials, who asked not to be identified, citing
policy. Ireland, which holds the EU’s rotating presidency until
the end of June and favors backloading, announced at the meeting
it’s planning to next raise the issue at a working group in the
middle of May, the officials said.

To be enacted, the plan needs support from the EU assembly
and 255 out of 345 government votes. European countries are
“getting there” to endorse it, EU Climate Commissioner Connie
Hedegaard said last month.

The lack of a strong signal from EU member states before
Parliament’s vote was one of the reasons why the assembly
blocked the proposal, according to Groote. The rejection may now
give some undecided nations a reason to further delay their
official positions, said two EU officials who declined to be
identified citing policy.

‘Wrong Way’

Several countries, including Germany and the Czech
Republic, haven’t declared yet whether they will back the
proposed rescue plan. The Parliament’s vote showed that
“backloading is a wrong way to go,” according to Environment
Minister Marcin Korolec of Poland, which opposes the fix
together with Cyprus and Greece amid concerns that the measure
will increase energy prices.

Should member states muster a qualified majority for
backloading, the Parliament is ultimately unlikely to prevent it
from being enacted, Lehtonen said. Following the talks in the
environment panel, lawmakers may either back the plan and agree
on negotiations with member states or confirm their initial
verdict and formally reject the proposal in the first reading.

Absolute Majority

That would start the second reading, in which opponents of
backloading will need an absolute majority, or 378 ballots, to
change or scrap the proposal. If they fail to muster the
required majority, the measure would be deemed adopted as
proposed by member states, who can amend the original version
drafted by the commission.

“The decision to send the backloading proposal back to the
committee was to signal that the Parliament is open for a
compromise,” Lehtonen said. “The Parliament can’t kill the
measure until the second reading and given the result of the
first vote there’s no majority for it. It’s up to member states
now to decide.”